FLAT SPIN
In the past, some airplanes displayed an unrecoverable spin in which the nose was higher, relative to the horizon, than in conventional spins. This is sometimes called a flat spin...Depending on the aircraft, rudder and aileron inputs and changing engine power settings may have little effect.... Unfortunately, the great majority of pilots who have experienced an unrecoverable spin have not lived to talk about it.

Commercial Loan Defaults May Triple as Rental Income Declines
By Hui-yong Yu

Dec. 22 (Bloomberg) -- U.S. commercial properties at risk of default could triple if rental income from office, retail and apartment buildings drops by even 5 percent, a likely possibility given the recession, according to research by New York-based real estate analysts at Reis Inc.

Lenders that used optimistic rent estimates to grant mortgages beginning in 2005 stand to lose as much as $23.1 billion, or 7.02 percent, of total unpaid balances if landlords lose 5 percent of net operating income, according to Reis. Analysts examined data on 22,890 properties that together may account for unpaid loans of about $329 billion in 2009, said Victor Calanog, director of research.

Banks are at risk as office vacancies are forecast to rise to 15.6 percent next year from an estimated 14.6 percent at the end of 2008. Lenders who sold commercial mortgage-backed securities to pension funds, investment banks and foreign governments have been hit by more than $1 trillion in losses and asset writedowns connected to bad residential loans.

“A large decline in net operating income isn’t necessary to shift a lot of properties underlying CMBS loans into debt- service coverage ratios that would be worrisome,” Calanog said in an interview.

Unwarranted Optimism

Over the last three years, lenders raised income projections for commercial properties by as much as 15 percent more than those properties’ historical performance, he said.

“That optimism might not be warranted,” Calanog said. “There’s a big pool of loans underwritten in 2005 and 2006 coming due in 2010 and 2011 that I believe will experience a rise in delinquencies and defaults.”

Loans from those years assumed strong growth in rents, a scenario that seems unlikely as the recession deepens, Calanog said.

Economists expect the nation’s economic slump will be the longest since World War II as banks restrict credit, home and stock values plunge and job losses mount. The number of Americans filing first-time applications for unemployment benefits reached a 26-year high of 575,000 in the week ended Dec. 6, according to the Labor Department.

U.S. retail sales fell for a fifth consecutive month in November in the longest string of declines since recordkeeping began in 1992, according to the Commerce Department. The job losses and record drop in home values have shaken consumer confidence.

Day of Reckoning

Green Street Advisors Inc. said Oct. 3 its research also indicates a potential increase in commercial defaults.

“The day of reckoning for commercial real estate has been delayed, not dodged, and the delay means that markets for commercial real estate will remain discombobulated long after conditions have improved elsewhere,” wrote Mike Kirby, director of research of Green Street in Newport Beach, California.

Reis estimates at least 353 properties, or 1.5 percent of the total number analyzed, could fall into default as net operating income, mainly from rent, barely clears loan payments.

Properties at risk include those with net operating income less than 1.1 times their loan payment, Calanog said. That “base case” translates to $9.08 billion of unpaid balances, or 2.76 percent of the total dollar value outstanding on the mortgages.

If the net operating income estimates used to make the loans were to fall by 5 percent across the board, the unpaid balance at risk would rise to $23.1 billion, or 7.02 percent of the total, Reis found.

Watch List

A 10 percent drop in income would push up the portion of at-risk loans to $82.3 billion, or 25 percent of the unpaid balance, said Calanog.

The Promenade Shops at Dos Lagos, a retail project in the Riverside-San Bernardino-Ontario area in Southern California, has been on Reis’s watch list and was transferred to a special servicer last November.

Even a building with a large, stable tenant in midtown Manhattan might be at risk, Calanog said.

The biggest property developers in the U.S. are asking to be included in a new $200 billion loan program, the Wall Street Journal reported today. Thousands of office complexes, hotels and shopping centers may be at risk of default, the newspaper said, citing a letter from real estate trade groups.